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UNIVERSITY OF THEPUNJAB
CREDITRISKMANAGEMENTANDCREDITRATING
SUBMITTED TO:
Ms. Sahar Butt
SUBMITTED BY:
Group:
Sana Javaid (BC09-070)
Saira Khan (BC09-067)
Sadia Khalid (BC09-069)
Sana Afzal (BC09-065)
Rabia Pervaiz (BC09-068)
Haffsa Idrees (BC09-061)
Class: B.Com. (Hons.)
Semester: 7
Section: A (Morning)
Subject Code: F2
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Table of ContentsINTRODUCTION ....................................................................................................................... 3
Credit risk Management: .............................................................................................. 3
Credit Rating: ............................................................................................................... 3
CREDIT RISK MANAGEMENT .................................................................................................. 3
Credit Risk .............................................................................................................................. 3
Types of Credit Risk ............................................................................................................ 4
Impact and Probability of Credit Risk .................................................................................. 4
Principles of Effective Credit Risk Management ..................................................................... 5
Credit Risk Management Process .......................................................................................... 6
CREDIT ANALYSIS ................................................................................................................ 7
Debt Service Coverage Ratio .............................................................................................. 7
CREDIT RISK ANALYSIS METRICS...................................................................................... 8
The Five Cs of Credit Analysis ............................................................................................ 8
BASIC TERMINOLOGIES ...................................................................................................... 9
CREDIT ASSESSMENT ..................................................................................................... 9
CREDIT CRUNCH .............................................................................................................. 9
CREDIT EXPOSURE .......................................................................................................... 9Credit rating ..............................................................................................................................10
Credit Rating Scale................................................................................................................10
Investment Grade ..............................................................................................................11
Speculative grade ..............................................................................................................11
International Short-term Credit Ratings ..................................................................................13
Credit Report ............................................................................................................................15
Credit Reporting ....................................................................................................................15
Working Of Credit Reporting Companies ...............................................................................15
Credit Rating Agency .............................................................................................................16
International Credit Rating Agencies ..................................................................................16
Local and International Credit Rating Agencies ..................................................................16
TOP 4 INTERNATIONAL CRS .............................................................................................18
1. MOODYS ...................................................................................................................18
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2. Standard & Poors ..........................................................................................................19
3. Fitch ...............................................................................................................................20
4. DBRS ..........................................................................................................................21
PACRA ..................................................................................................................................24
INTRODUCTION ...............................................................................................................24
PRODUCTS OFFERED: ....................................................................................................24
RATING MATRIX ...............................................................................................................25
RESEARCH .......................................................................................................................25
PACRAS RATING.............................................................................................................26
FUND STABILITY RATINGS .............................................................................................27
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Principles of Effective Credit Risk Managementv
The following are what are considered to be the nine principle components necessary to
conduct safe and sound lending activities and to ensure for an effective credit risk
management program:
1. Credit Risk Appetite - Establishing a well-defined credit risk appetite for your institution
is the critical first step toward an effective lending and credit risk management program.
2. Underwriting Criteria - Establishing equally well-defined underwriting criteria which
includes both quantitative (objective) and qualitative (subjective) factors and provides the
foundation upon which the institution can build a quality loan portfolio consistent with its
risk appetite.
3. Credit Analysis - Conducting a thorough and appropriate (i.e., CRE vs. C&I) analysis of
credit risk at the approval phase and throughout the life of a loan is critical to ensuring
that lending decisions are made according to the institutions risk appetite and
underwriting criteria. The analysis should include both quantitative (objective) and
qualitative (subjective) factors.
4. Credit Risk Rating Methodology - Adopting a clear and concise credit risk rating
methodology which similarly includes both quantitative (objective) and qualitative
(subjective) factors provides for the effective grading of credit risk across the loan
portfolio. It is also the basis upon which proactive and effective measurement,
monitoring, and control of credit risk exposure can be built.
5. Loan Review - In order to ensure that loans have been appropriately risk rated, aperiodic assessment of the credit risk of each loan should be performed. This review
should be independent from the lending area and be conducted with an appropriate
scope of coverage (in terms of both number of loans and outstanding balances) and
frequency.
6. Loan Monitoring/Management - Once a loan has been originated it becomes a living,
breathing organism of credit risk which must be proactively and appropriately monitored
throughout its life. Receipt and analysis of updated financial information on the borrower
and guarantors (if any), as well as the periodic assessment of collateral coverage, is key
for ensuring that the level of credit risk is effectively measured, monitored, and controlled
from origination through maturity.
7. Portfolio Monitoring and Reporting - Similarly to the measurement, monitoring, and
management of credit risk at the individual loan level, doing so at the portfolio level
provides for an aggregate perspective on overall credit risk across the portfolio,
particularly in terms of concentrations by loan, borrower, industry type,
product/commodity type, and/or geographical location, as well as the aggregate level of
exposure to related borrowers.
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8. Stress Testing - As the loan portfolio grows in terms of both number and variety, stress
testing on both a loan-by-loan basis and at the portfolio level becomes increasingly
important to measure the overall credit risk exposure inherent in the loan portfolio and
the potential increase or decrease due to changes in key factors (i.e., interest rates, cap
rates, net operating income, etc.).
9. Allowance for Loan and Lease Losses (ALLL) - A clearly defined loan loss reserve
methodology that is consistent with applicable regulatory guidelines and Generally
Accepted Accounting Principles (GAAP) is critical towards protecting the institution
from credit losses.
All of the above components should be incorporated into a comprehensive set of policies
and procedures covering all aspects of the lending and credit risk management program.
Credit Risk Management Process
It involves four major steps:
1) Risk Identification: It can be done by gathering data from
a) Balance sheets (Non-performing loans, capital, reserves, etc)
b) Call and thrift financial reports/ income statements
2) Risk Assessment: It can be done in three waysvi:
a) Quantitative Analysis: Ratio, peer and trend analysis
b) Qualitative Analysis: It can be done by analyzing
i) Holding company and systematic support
ii) Balance sheet and loan composition
iii) Ratings
iv) Stock price performance
c) Recent Developments: Review
i) Recent enforcement actions
ii) Management changes
iii) Acquisitions
iv) New market entries
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3) Risk Response Development: Decide on the available and applicable control measures
and hierarchy of control. The available measures for credit risk management could be to:
a) Eliminate
b) Mitigate
c) Transfer
d) Share
e) Accept
f) Contingency plan
4) Risk Response Control: Implement the control measure that has been decided upon
according to the nature, impact and probability of the credit risk.
CREDIT ANALYSISvii
Credit analysis is the method by which one calculates the credit-worthiness of a business or
organization. The audited financial statements of a large company might be analyzed when it
issues or has issued bonds or; a bank may analyze the financial statements of a small business
before making or renewing a commercial loan. The term refers to either case, whether the
business is large or small.
Credit analysis involves a wide variety of financial analysis techniques, including:
Ratio and trend analysis
Creation of projections
Detailed analysis of cash flows
Examination of collateral and other sources of repayment
Examination of credit history and management ability
Analysts attempt to predict the probability that a borrower will default on its debts, and also the
severity of losses in the event of default.
Debt Service Coverage Ratio
Before approving a commercial loan, a bank will look at all of these factors with the
primary emphasis being the cash flow of the borrower. A typical measurement of repayment
ability is the debt service coverage ratio. A credit analyst at a bank will measure the cash
generated by a business (before interest expense and excluding depreciation and any other
non-cash or extraordinary expenses). The debt service coverage ratio divides this cash flow
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How Credit Risk Analysis Inform s Lending Practices?
The importance of each metric can vary considerably from applicant to applicant. Not only do
they help a lender decide whether or not to issue credit, they also influence payment terms,
credit limit, and if there are additional assurances that need to be made.
BASIC TERMINOLOGIES
Certain terminologies must be considered before studying the credit risk management concept.
Some of them are as follows:
Credit assessment
Credit crunch
Credit exposure
ix
CREDIT ASSESSMENTYour credit is calculated as 'Good', 'Fair' or 'Needs Improvement'. A good credit assessment
means you should be able to qualify, within the limits of your income, for most loans. You are
also much more likely to receive the best interest rates available. If your credit is fair, you will
probably not have trouble qualifying for a loan, but you may not receive the best available
interest rate. If your credit rating needs improvement, you may have issues that could limit your
ability to qualify for many loans.
xCREDIT CRUNCH
It is an economic condition in which investment capital is difficult to obtain. Banks and investors
become wary of lending funds to corporations, which drives up the price of debt products for
borrowers.
Credit crunches are usually considered to be an extension of recessions. A credit crunch makes
it nearly impossible for companies to borrow because lenders are scared of bankruptcies or
defaults, which results in higher rates. The consequence is a prolonged recession (or slower
recovery), which occurs as a result of the shrinking credit supply.
xiCREDIT EXPOSURE
The total amount of credit extended to a borrower by a lender. The magnitude of credit
exposure indicates the extent to which the lender is exposed to the risk of loss in the event of
the borrower's default.
For example, if a bank has made short-term and long-term loans totaling $100 million to
company A, its credit exposure to company A is $100 million.
In general, a bank will seek to have greater credit exposure to its customers with the highest
credit rating, and less exposure to clients with a lower credit rating. If a customer encounters
unexpected financial problems, the bank may seek to reduce its credit exposure in order to
mitigate the risk of loss arising from a potential default.
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Credit rating
A credit rating evaluates the credit worthiness of a debtor, especiallya business (company) or a government. It is an evaluation made by a credit rating agency of thedebtor's ability to pay back the debt and the likelihood of default.[3]
Credit ratings are determined by credit ratings agencies. The credit rating represents thecredit rating agency's evaluation of qualitative and quantitative information for a company orgovernment; including non-public information obtained by the credit rating agencies analysts.
Credit ratings are not based on mathematical formulas. Instead, credit rating agenciesuse their judgment and experience in determining what public and private information should beconsidered in giving a rating to a particular company or government. The credit rating is used byindividuals and entities that purchase the bonds issued by companies and governments todetermine the likelihood that the government will pay its bond obligations.
A poor credit rating indicates a credit rating agency's opinion that the company orgovernment has a high risk of defaulting, based on the agency's analysis of the entity's history
and analysis of long term economic prospects.
Credit score
A credit score is a numerical expression based on a statistical analysis of a person'scredit files, to represent the creditworthiness of that person. A credit score is primarily basedon credit report information typically sourced from credit bureaus.
Lenders, such as banks and credit card companies, use credit scores to evaluate the
potential risk posed by lending money to consumers and to mitigate losses due to bad debt.Lenders use credit scores to determine who qualifies for a loan, at what interest rate, and whatcredit limits. Lenders also use credit scores to determine which customers are likely to bring inthe most revenue. The use of credit or identity scoring prior to authorizing access or grantingcredit is an implementation of a trusted system.
Credit scoring is not limited to banks. Other organizations, such as mobile phonecompanies, insurance companies, landlords, and government departments employ the sametechniques. Credit scoring also has a lot of overlap with data mining, which uses many similartechniques.
Credit Rating Scale
The credit rating of a corporation is a financial indicator to potential investorsof debt securities such as bonds. Credit rating is usually of a financial instrument such as abond, rather than the whole corporation. These are assigned by credit rating agencies suchas A. M. Best, Dun & Bradstreet, Standard & Poor's, Moody's or Fitch Ratings and have letterdesignations such as A, B, C. The Standard & Poor's rating scale is as follows, from excellent topoor: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC,CCC-, CC, C, D. Anything lower than a BBB- rating is considered a speculative or junk bond.
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International long-term credit ratings
International Long-Term Credit Ratings (LTCR) may also be referred to as Long-TermRatings. When assigned to most issuers, it is used as a benchmark measure of probability ofdefault and is formally described as an Issuer Default Rating (IDR). When applied to issues orsecurities, the LTCR may be higher or lower than the issuer rating (IDR) to reflect relative
differences in recovery expectations. The following rating scale applies to foreign currency andlocal currency ratings:
Investment Grade
AAAHighest credit quality. 'AAA' ratings denote the lowest expectation of credit risk.They are assigned only in case of exceptionally strong capacity for payment offinancial commitments. This capacity is highly unlikely to be adversely affectedby foreseeable events.
AAVery high credit quality. 'AA' ratings denote expectations of very low credit risk.
They indicate very strong capacity for payment of financial commitments. Thiscapacity is not significantly vulnerable to foreseeable events.
AHigh credit quality. 'A' ratings denote expectations of low credit risk. The capacityfor payment of financial commitments is considered strong. This capacity may,nevertheless, be more vulnerable to changes in circumstances or in economicconditions than is the case for higher ratings.
BBBGood credit quality. 'BBB' ratings indicate that there is currently expectation oflow credit risk. The capacity for payment of financial commitments is consideredadequate but adverse changes in circumstances and economic conditions aremore likely to impair this capacity. This is the lowest investment grade category.
Speculative grade
BB Speculative'BB' ratings indicate that there is a possibility of credit risk developing, particularlyas the result of adverse economic change over time; however, business orfinancial alternatives may be available to allow financial commitments to be met.Securities rated in this category are not investment grade.
B Highly speculativefor issuers and performing obligations, 'B' ratings indicate that significant creditrisk is present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upona sustained, favorable business and economic environment.
For individual obligations, may indicate distressed or defaulted obligations withpotential for extremely high recoveries. Such obligations would possess aRecovery Rating of 'R1' (outstanding).
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CCCFor issuers and performing obligations, default is a real possibility. Capacity formeeting financial commitments is solely reliant upon sustained, favorablebusiness or economic conditions.
For individual obligations, may indicate distressed or defaulted obligations with
potential for average to superior levels of recovery. Differences in credit qualitymay be denoted by plus/minus distinctions. Such obligations typically wouldpossess a Recovery Rating of 'R2' (superior), or 'R3' (good) or 'R4' (average).
CCFor issuers and performing obligations, default of some kind appears probable.
For individual obligations, may indicate distressed or defaulted obligations with aRecovery Rating of 'R4' (average) or 'R5' (below average).
Grade CFor issuers and performing obligations, default is imminent.
For individual obligations, may indicate distressed or defaulted obligations withpotential for below-average to poor recoveries. Such obligations would possess aRecovery Rating of 'R6' (poor).
RDIndicates an entity that has failed to make due payments (within the applicablegrace period) on some but not all material financial obligations, but continues tohonor other classes of obligations.
DIt indicates an entity or sovereign that has defaulted on all of its financialobligations. Default generally is defined as one of the following:
Failure of an obligor to make timely payment of principal and/or interest underthe contractual terms of any financial obligation;
The bankruptcy filings, administration, receivership, liquidation or other winding-up or cessation of business of an obligor; or
The distressed or other coercive exchange of an obligation, where creditorswere offered securities with diminished structural or economic terms comparedwith the existing obligation.
Default ratings are not assigned prospectively; within this context, non-paymenton an instrument that contains a deferral feature or grace period will not be considered adefault until after the expiration of the deferral or grace period.
Issuers will be rated 'D' upon a default. Defaulted and distressed obligationstypically are rated along the continuum of 'C' to 'B' ratings categories, depending upon
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their recovery prospects and other relevant characteristics. Additionally, in structuredfinance transactions, where analysis indicates that an instrument is irrevocably impairedsuch that it is not expected to meet pay interest and/or principal in full in accordance withthe terms of the obligation's documentation during the life of the transaction, but whereno payment default in accordance with the terms of the documentation is imminent, theobligation may be rated in the 'B' or 'CCC-C' categories.
Default is determined by reference to the terms of the obligations' documentation.Fitch will assign default ratings where it has reasonably determined that payment hasnot been made on a material obligation in accordance with the requirements of theobligation's documentation, or where it believes that default ratings consistent withFitch's published definition of default are the most appropriate ratings to assign.
International Short-term Credit Ratings
The following ratings scale applies to foreign currency and local currency ratings. AShort-term rating has a time horizon of less than 13 months for most obligations, or up to three
years for US public finance, in line with industry standards, to reflect unique risk characteristicsof bond, tax, and revenue anticipation notes that are commonly issued with terms up to threeyears. Short-term ratings thus place greater emphasis on the liquidity necessary to meetfinancial commitments in a timely manner.
F1Highest credit quality. Indicates the strongest capacity for timely payment offinancial commitments; may have an added "+" to denote any exceptionallystrong credit feature.
F2Good credit quality. A satisfactory capacity for timely payment of financialcommitments, but the margin of safety is not as great as in the case of the higher
ratings. F3
Fair credit quality. The capacity for timely payment of financial commitments isadequate; however, near term adverse changes could result in a reduction to noninvestment grade.
BSpeculative. Minimal capacity for timely payment of financial commitments, plusvulnerability to near term adverse changes in financial and economic conditions.
CHigh default risk. Default is a real possibility. Capacity for meeting financialcommitments is solely reliant upon a sustained, favorable business andeconomic environment.
RDIndicates an entity that has defaulted on one or more of its financialcommitments, although it continues to meet other obligations.
DIndicates an entity or sovereign that has defaulted on all of its financialobligations.
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Credit ReportxiiA report containing detailed information on a person's credit history, including identifying
information, credit accounts and loans, bankruptcies and late payments, and recent inquiries. Itcan be obtained by prospective lenders with the borrower's permission, to determine his or
her credit worthinessCredit Reporting
Credit reporting is the process that credit reporting agencies, also called credit bureaus,use to inform banks and other businesses about your payment and spending habits via yourcredit report. Your credit report is maintained by companies known as credit reporting agenciesor credit bureaus. There are three major credit reporting agencies in the United StatesEquifax, Experian, and TransUnion.
Periodically, the companies you do business with send updates to the credit reportingagencies to let them know how youre doing on your financial obligations. For example, your
credit card issuer will update your account to include your account balance, credit limit, monthlypayment, recent payment history, and current status of your account.
Working Of Credit Reporting Companiesxiii
A credit report is such an important piece of information that every person who has
received credit is entitled to a free one each year. But what exactly is this document that wields
so much power? The credit reporting companies Trans Union, Equifax and Experian are thethree major companies that maintain credit reports. The credit reporting companies issue credit
reports to creditors, insurers and others as permitted under law.
Here's an example of how the system works:
When you apply for a new credit card, the creditor requests a copy of your financial history, or
credit report, from one or more of the credit reporting companies. The creditor may use your
credit report, a score, and other information you provide (such as income or debt information) to
determine whether to approve your application and what rates to offer. If you are issued a card,
the creditor reports that account to the credit reporting companies, and then updates it, including
your balance and payment activity, about every 30 days.
The credit reporting companies update your credit report as they receive new information from
creditors or lenders. Your credit profile change based on your financial activity. The next time
you apply for a credit card or loan, the process repeats.
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Credit Rating Agencyxiv
A credit rating agency (CRA) is a company that assigns credit ratings forissuers of
certain types ofdebt obligations as well as the debt instruments themselves. In some cases, the
servicers of the underlying debt are also given ratings.
In most cases, the issuers ofsecurities are companies, special purpose entities, state
and local governments, non-profit organizations, or national governments issuing debt-like
securities (i.e., bonds) that can be traded on a secondary market. A credit rating for an issuer
takes into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan), and
affects the interest rate applied to the particular security being issued.
A company that issues credit scores for individual credit-worthiness is generally called
a credit bureau (US) orconsumer credit reporting agency (UK).
ESMA is exclusively responsible for the registration and supervision of Credit Rating
Agencies in the European Union. A full list of all CRA's currently registered in the EU, can befound via the menu.
In addition, ESMA also carries out policy work to prepare future legislation, such as
regulatory technical standards, and guidelines. This work is undertaken through the CRA
technical committee, which has representatives from all the national competent authorities.
International Credit Rating Agencies
Canadian bond rating service(BRS)
Dominion bond rating service(DBRS)
Duff and Phelps credit rating agency
Fitch IBCA Ital rating DCR SPA
Japan credit rating agency(JCRA)
Japan rating and investment information
Mikuni and co.
Moodys investor service
Standard and poors rating service
Thompson bank watch
Local and International Credit Rating Agencies
M. Best (U.S.) Baycorp Advantage (Australia) Bulgarian Credit Rating Agency (Bulgaria, European Union) Capital Intelligence (Cyprus) Capital Standards Rating (Kuwait) CARE Ratings (India) Credo line (Ukraine) Credit Rating Information and Services Limited(CRISL), (Bangladesh) CRISIL (India)
http://en.wikipedia.org/wiki/A._M._Besthttp://en.wikipedia.org/wiki/U.S.http://en.wikipedia.org/wiki/Baycorp_Advantagehttp://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/w/index.php?title=Bulgarian_Credit_Rating_Agency&action=edit&redlink=1http://en.wikipedia.org/wiki/Bulgariahttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/Cyprushttp://en.wikipedia.org/w/index.php?title=Capital_Standards_Rating&action=edit&redlink=1http://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/w/index.php?title=CARE_Ratings&action=edit&redlink=1http://en.wikipedia.org/wiki/Credo_linehttp://en.wikipedia.org/wiki/Ukrainehttp://en.wikipedia.org/wiki/Credit_Rating_Information_and_Services_Limitedhttp://en.wikipedia.org/wiki/Bangladeshhttp://en.wikipedia.org/wiki/CRISILhttp://en.wikipedia.org/wiki/CRISILhttp://en.wikipedia.org/wiki/Bangladeshhttp://en.wikipedia.org/wiki/Credit_Rating_Information_and_Services_Limitedhttp://en.wikipedia.org/wiki/Ukrainehttp://en.wikipedia.org/wiki/Credo_linehttp://en.wikipedia.org/w/index.php?title=CARE_Ratings&action=edit&redlink=1http://en.wikipedia.org/wiki/Kuwaithttp://en.wikipedia.org/w/index.php?title=Capital_Standards_Rating&action=edit&redlink=1http://en.wikipedia.org/wiki/Cyprushttp://en.wikipedia.org/wiki/European_Unionhttp://en.wikipedia.org/wiki/Bulgariahttp://en.wikipedia.org/w/index.php?title=Bulgarian_Credit_Rating_Agency&action=edit&redlink=1http://en.wikipedia.org/wiki/Australiahttp://en.wikipedia.org/wiki/Baycorp_Advantagehttp://en.wikipedia.org/wiki/U.S.http://en.wikipedia.org/wiki/A._M._Best7/28/2019 Credit Risk Management and Credit Rating
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Dagong Global Credit Rating (People's Republic of China) Dominion Bond Rating Service (Canada) Duportl (UK) Egan-Jones Rating Company (U.S.) First Afghan Credit Risk Ratings (Afghanistan)FACRR First Report, (UK) Fitch Ratings (Dual-headquartered U.S./UK), 80% of which is owned
by FIMALAC, a French firm. Global Credit Ratings Co. (Africa) HR Ratings (Mexico) ICRA Limited (India) SMERA (India) Japan Credit Rating Agency, Ltd. (Japan) Kroll Bond Rating Agency (U.S.) Moody's Investors Service (U.S.) Muros Ratings (Russia alternative rating agency) Rapid Ratings International (U.S.)
Pakistan Credit Rating Agency Limited (Pakistan) Standard & Poor's (U.S.) UK Credit Info (U.K.) Weiss Ratings (U.S.) Onicra Credit Rating Agency of India Ltd (India)
The Big Three credit rating agencies are Standard & Poor's, Moody's Investor Service,
and Fitch Ratings. Moody's and S&P each control about 40 percent of the market. Third-ranked
Fitch Ratings, which has about a 14 percent market share, sometimes is used as an alternative
to one of the other majors.
http://en.wikipedia.org/wiki/Dagong_Global_Credit_Ratinghttp://en.wikipedia.org/wiki/People%27s_Republic_of_Chinahttp://en.wikipedia.org/wiki/Dominion_Bond_Rating_Servicehttp://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/w/index.php?title=Duportl&action=edit&redlink=1http://en.wikipedia.org/wiki/UKhttp://en.wikipedia.org/wiki/Egan-Jones_Rating_Companyhttp://en.wikipedia.org/w/index.php?title=First_Afghan_Credit_Risk_Ratings&action=edit&redlink=1http://afghanriskratings.com/http://www.firstreport.co.uk/http://en.wikipedia.org/wiki/Fitch_Ratingshttp://en.wikipedia.org/wiki/UKhttp://en.wikipedia.org/wiki/FIMALAChttp://en.wikipedia.org/w/index.php?title=Global_Credit_Ratings_Co.&action=edit&redlink=1http://en.wikipedia.org/wiki/Africahttp://en.wikipedia.org/w/index.php?title=HR_Ratings&action=edit&redlink=1http://en.wikipedia.org/wiki/ICRA_Limitedhttp://en.wikipedia.org/wiki/SMERAhttp://en.wikipedia.org/wiki/Japan_Credit_Rating_Agency,_Ltd.http://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/w/index.php?title=Kroll_Bond_Rating_Agency&action=edit&redlink=1http://en.wikipedia.org/wiki/Moody%27s_Investors_Servicehttp://en.wikipedia.org/wiki/Russiahttp://www.rapidratings.com/http://en.wikipedia.org/w/index.php?title=Pakistan_Credit_Rating_Agency_Limited&action=edit&redlink=1http://en.wikipedia.org/wiki/Standard_%26_Poor%27shttp://www.ukcreditinfo.co.uk/http://en.wikipedia.org/w/index.php?title=Weiss_Ratings&action=edit&redlink=1http://en.wikipedia.org/wiki/Standard_%26_Poor%27shttp://en.wikipedia.org/wiki/Moody%27shttp://en.wikipedia.org/wiki/Fitch_Ratingshttp://en.wikipedia.org/wiki/Fitch_Ratingshttp://en.wikipedia.org/wiki/Moody%27shttp://en.wikipedia.org/wiki/Standard_%26_Poor%27shttp://en.wikipedia.org/w/index.php?title=Weiss_Ratings&action=edit&redlink=1http://www.ukcreditinfo.co.uk/http://en.wikipedia.org/wiki/Standard_%26_Poor%27shttp://en.wikipedia.org/w/index.php?title=Pakistan_Credit_Rating_Agency_Limited&action=edit&redlink=1http://www.rapidratings.com/http://en.wikipedia.org/wiki/Russiahttp://en.wikipedia.org/wiki/Moody%27s_Investors_Servicehttp://en.wikipedia.org/w/index.php?title=Kroll_Bond_Rating_Agency&action=edit&redlink=1http://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Japan_Credit_Rating_Agency,_Ltd.http://en.wikipedia.org/wiki/SMERAhttp://en.wikipedia.org/wiki/ICRA_Limitedhttp://en.wikipedia.org/w/index.php?title=HR_Ratings&action=edit&redlink=1http://en.wikipedia.org/wiki/Africahttp://en.wikipedia.org/w/index.php?title=Global_Credit_Ratings_Co.&action=edit&redlink=1http://en.wikipedia.org/wiki/FIMALAChttp://en.wikipedia.org/wiki/UKhttp://en.wikipedia.org/wiki/Fitch_Ratingshttp://www.firstreport.co.uk/http://afghanriskratings.com/http://en.wikipedia.org/w/index.php?title=First_Afghan_Credit_Risk_Ratings&action=edit&redlink=1http://en.wikipedia.org/wiki/Egan-Jones_Rating_Companyhttp://en.wikipedia.org/wiki/UKhttp://en.wikipedia.org/w/index.php?title=Duportl&action=edit&redlink=1http://en.wikipedia.org/wiki/Canadahttp://en.wikipedia.org/wiki/Dominion_Bond_Rating_Servicehttp://en.wikipedia.org/wiki/People%27s_Republic_of_Chinahttp://en.wikipedia.org/wiki/Dagong_Global_Credit_Rating7/28/2019 Credit Risk Management and Credit Rating
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TOP 4 INTERNATIONAL CRS
Here is the list of Top 4 international Credit Rating Agencies of the world. These agencies areNationally Recognized Statistical Rating Organizations by the U.S. Securities and ExchangeCommission.
1. MOODYSxv
Moodys is the oldest credit rating agency. It is also the first rating agency to be recognized by
NRSRO in 1975. The company became public in 2000. It has been earning huge profits.
Average profit margin was 53% from 2000 to 2007. Structured finance products were its top
source of revenue by 2000.
MOODY'S RATING PROCESS
Meeting with managementThe Moody's analyst will discuss the meeting agenda with the issuer in advance of the
meeting, to ensure the issuer is aware of the type of information Moody's typically receives atsuch a meeting. The discussion at the rating meeting will generally focus on the subjects likeBackground and history of the company/entity , Industry/sector trends ,Management structure ,
Basic operating and competitive position , Corporate strategy and philosophy, Debt structure,Financial position and sources of liquidity.
Moody's Rating Committee
The role of the Moody's rating committee is to introduce as much objectivity into theprocess as possible by bringing an understanding of the relevant risk factors and viewpoints toeach and every analysis. Factors considered in determining the make-up of a rating committeemay include the size of the issue, the complexity of the credit, and the introduction of a newinstrument.
Rating Process Timeline
Moody's rating process, from the time of the preliminary discussion to the public releaseof the rating, takes approximately 60-90 days. However, Moody's is sensitive to issuers' needsand timing concerns, and will be as flexible and responsive as possible in order toaccommodate tighter financing schedules and other requirements.
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Rating Dissemination and Publication
Once the rating committee has made its decision, the issuer will be informed of therating and Moody's rationale. For a public rating, the new rating is distributed by press releasesimultaneously to the major financial media worldwide.
External Rating Appeals
There may be instances in which the issuer has new or additional information that wasnot available to Moodys for consideration by the rating committee in reaching its not -yet-published credit rating decision. In these circumstances, issuers may request that Moodysreconsider its decision based on this new or additional information, a process that is commonlyreferred to as an external appeal.
Right of Refusal of the Moody's Rating in Asia Pacific
Moody's provides first-time rating applicants with the ability to determine whether their
ratings will be made public, subject to certain limitations, in the event of a debt issuance by theapplicant in any of the international capital markets at a later date. If applicants choose not tohave their rating published, then both Moody's and the applicant will keep the rating confidential.Companies will not be permitted to disclose their Moody's rating on a selective basis.
Treatment of Confidential Information
Moody's recognizes that an issuer's trust in the confidential nature of the ratingrelationship is an essential component of the rating process. Confidential information will not bepublicly disclosed, but, if relevant, will be used in the formulation of the public rating opinion.
On-Going Relationship
The Moody's analyst will maintain regular contact with the issuer both electronically andvia the telephone, and will be available at all times to respond to an issuer's needs or questions
2. Standard & Poorsxvi
The agency is owned by Mc Graw-Hill Inc. It has been published any stock indices of theworld, most famous being S&P 500 index which is the most watched index in the world.McGraw-Hill reported a net profit margin of 12.6 percent for 2008. It has following ratingprocesses:
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1) Rating Issu ers & Issues
2) Typical Process for a New Corporate or Governm ent Rating
Contract
Pre evaluation. Management meeting.. Analysis. Rating committee. Notification. Publication
3) Rating Corpo rate and Go vernment Issuers & Issues
Request The Initial Rating Process The Analytical Team & Rating Committee Pre evaluation Management meeting. Analysis Committee evaluation Notification of issuer Publication.
5) Process for Rating Structured Finance Instruments - Key Differences Highl ight ed
Request Pre evaluation Analysis Rating Committees
3. Fitchxvii
Fitch is smallest among the top three agencies. It is a part of Fitch Group. It Was the thirdagency to become an NRSRO in 1975. From 1975 to 1992, four other agencies wererecognized as NRSROs and all subsequently merged with Fitch.
Analytical Team Input from Rated Entities The Committee Process Criteria Development Differences of Opinion
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Access to Confidential Information Surveillance of Ratings Rating Dissemination Product Range Timing of the Process Fees
4. DBRS xviii
DBRS is privately owned Canadian ratings agency has been the top ratings agency inCanada for 30 years. It became the fourth NRSRO in 2003. DBRS believes that it can competewith the big three but is not favored by authorities. The Rating Process Corporate andStructured Finance are:
CORPORATE RATING PROCESS
Initial Contact
In most cases, the organization is contacted by the issuer directly or by its
investment banker or dealer and requested to conduct a corporate rating.
Letter of Engagement
In order to formalize the rating assignment, the terms of the engagement areconfirmed.
Information on the Issuer
Relevant information about the issuer is obtained, and may be received from avariety of sources including third parties, for the purposes of conducting the rating
analysis.
Meeting with Management
An extensive meeting or series of meetings is generally conducted withmanagement regarding all relevant aspects of the issuers business.
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Draft Rating Report
Following analysis of the information obtained, typically a draft rating report isprepared.
Rating Committee
The analysis and draft rating report, if prepared and proposed rating is submittedto the Rating Committee, who will determine the rating.
Review by the Issuer
Rating Committee reviews the report to ensure that the factual information iscorrect and that these materials do not contain any confidential information.
Publishing
Except for private ratings, internal assessments and for certain private placementtransactions, the final rating report is externally published, accompanied by the pressrelease.
Surveillance
Ongoing surveillance of all its ratings (including public and certain private ratingsand internal assessments) is performed.
STRUCTURED FINANCE RATING PROCESS
Initial Contact
An initial meeting with the sponsor, usually the financial institution which will bestructuring transactions for third party clients or selling assets directly into the specialpurpose vehicle (SPV), will be held to discuss the structure of the SPV.
Letter of Engagement
In order to formalize the rating assignment, the terms of the engagement areconfirmed.
Information on the Sponsor
The organization evaluates the sponsors financial and operational capabilities
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Structural and Legal Review
The sponsor will provide constituting documents to allow review to ensure thatthe legal structure is consistent with the described purpose of the SPV.
Draft Rating Report
A pre-sale or rating report is typically drafted by the lead analyst that focuses onrating rationale and the structural features of the transaction, the roles performed byvarious parties as well as the structural risk mitigants or flexibilities that exist within thetransaction.
Rating Committee
The analysis, draft rating report, and proposed rating are submitted to the RatingCommittee, who will determine the rating.
Review by the Sponsor
Once Rating Committee approval is received, the sponsor is provided with acopy of the press release and draft rating report, if prepared, to review to ensure thatthe factual information is correct.
Publishing
Except for private ratings, internal assessments and for certain private placementtransactions, the press release and final rating report, if prepared, is externally
published.
Surveillance
Each sponsor of a SPV structure is generally required to provide periodicperformance reports, which provides an overview of the performance of the pool ofreceivables and the transaction and, if relevant, prompt notification of any covenanttrigger and a proposed course of action to remedy the situation.
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PACRA
INTRODUCTION
PACRA seeks to be an agent of change, developing insightful risk solutions,
transforming both the rating business and the industry in line with the best practices. Being the
first rating agency in Pakistan, PACRA carries the onus of leadership. PACRA is in the businessto evaluate the capacity and willingness of an obligor to honor its financial obligations. Its credit
rating opinion reflects an independent, professional and impartial assessment of the credit risk
associated with a particular debt instrument or an entity. By providing a measurement of risk,
this facilitates investors in making prudent investment decisions. T.E.A.M - Together Everyone
Achieves More. The Board of Directors of PACRA comprises seven professionals drawn from
diverse fields. All Directors, except the Managing Director, are Non-Executive, while three of
them are Independent. PACRA was established in 1994 as a joint venture.
PRODUCTS OFFERED:
ENTITY RATING:
Entity rating signifies the level of investment risk and the capacity and/or willingness of
an entity to meet its debt obligations. The risk level is indicated by the long and short
term ratings.
INSTRUMENT RATING:
Instrument rating covers all non-equity instruments including TFCs (long and short term),
Sukuks, and bonds. By indicating the risk profile of the instrument, the assigned rating
helps the issuer in deciding the terms of the instrument while guiding the potential
investors in investment decision.
INSURER FINANCIAL STRENGHT:
The insurer financial strength (IFS) rating represents an opinion of an issuers financial
strength and business continuity from a policy holder's prospective. IFS rating captures
the relative ability of the insurer to meet policy holders' obligations. However, the rating
provides no guarantee against default but offers a well researched opinion as to the
likelihood of the issuer to fail to fulfill its obligations towards policy holders.
PROJECT GRADING:
The Project Grading (PG) is an opinion on a specific project being managed by any real
estate entity.
ASSET MANAGER RATING:
AM Rating differs fundamentally from credit ratings, which refer to the ability to meet
debt obligations. The focus of AM rating is to gauge the fund management capability of
the asset manager, as reflected from its operating platform, human resource base and
the infrastructure that it has erected. AM rating gives a view on whether the asset
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manager meets or exceeds the overall investment management best practices, the
benchmarks and standards in all criteria under review.
RATING MATRIX
RESEARCHGathering facts and figures, examining with a critical eye and drawing insights from the
entire activity with the objective of forming a view research forms an integral part of PACRAs
rating process. The primary outcome of research is a sector study report. PACRA adds value by
identifying specific array of factors that lead to credit risk in a particular industry.
RATING MATRIX
Rating Matrix is a set of standardizedmethodologies and policies. Thesegovern the evolution of the rating
opinion from start to finish and lendconsistency to PACRAs ratings.
Rating Matrix is periodically updated
PACRASMETHODOLIGIES.
PACRA bases its ratingsanalysis and opinions
upon established criteriaand methodologies and
applies them in a uniformand consistent manner
PACRAS POLICIES
PACRAs Rating Policiesare comprehensive anddetailed descriptions of
PACRAs rating practicesand procedure
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FUND STABILITY RATINGS
JCR-VIS has revised its Fund Stability criteria. The key change in the methodology pertains
to interest rate sensitivity of a fund at different rating grades.
RATING METHODOLOGY:
Fund Stability Ratings (FSRs) measure the sensitivity of a funds Net Asset Value (NAV)and total return to changing market conditions, with particular emphasis on downside
risk.
Credit Risk CriteriaAsset Allocation % of NAV**
FSR Issue / Issuer Rating
AA A A A+ AA-A+
AAA Min. 85% Max. 15% - --
AA+ Min. 50% Max. 30%* -
-AA Min. 25% Max.15%* -
AA-MAX 10%
DURATION CRITERIA / MATURITY CRITERIA
Fund Rating Wtd. Avg. Duration
AAA 45 DAYS
AA+ 60 DAYS
AA 90 DAYSAA- 180 DAYS
A BAND 1 YEARFor example, JCR-VIS shows rating like this:
Recent Announcements Ratings/Action
Jubilee General Insurance Company Limited12/28/2012 IFSPress Release / History
AA+ Upgrade
OUTLOOK StableInterpretation:
Press release shows detailed publication on insurer financial strength. History shows its
history regarding financial strength, which is in above scenario is upgraded. AA+ =60 days of
maturity.
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SERVICES OFFERED
Entity Ratings of Corporations, NBFIs & FIs
Credit Ratings of Term Finance Certificates and long term issues
Bank Finance Ratings
Commercial Paper Ratings Lease, Housing Finance, Credit Card and other Corporate/ Consumer
Finance Receivables
Securitization Ratings
Equity Ratings including initial public Offerings and Right Offerings
Insurer Financial Strength Ratings
Project Finance Ratings
Mutual Funds Ratings
Musharaka/Modaraba issues Ratings
Grading of Construction Projects
JCR-VIS RATING PROCESS
Issuer/Client 1.Signs agreement for an initial rating2.Submits preliminary information materials
JCR-VIS 3. Conducts a preliminary study4. Submits a detailed questionnaire to the issuer/client
Issuer/Client 5. Provides detailed information in response to detailedquestionnaire6. Conducts pre due diligence meeting analysis7. Conducts due diligence meetings
(4-5 weeks)
JCR-VIS 8. Conducts post due diligence analysis9. Brief for internal rating committee meetings is prepared10. Sub Committee recommends preliminary/initial rating11. Rating Committee decides the preliminary/initial rating12. Discusses the rating rationales and rating issues with client13. Notifies issuer of the preliminary/initial rating, deliberates onappeals by client, if any
Issuer/Client 14. Consents to release of preliminary/initial rating to the public incase of non-mandatory ratings
JCR-VIS 15. Releases the preliminary/initial rating to the press( 2-3 weeks)
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REFERENCES
i http://www.creditriskmanager.com/glossary/business-credit-ratingshttp://www.risk.no/credrisk.htmPrinciples for the Management of Credit Risk (by Basel Committee on banking Supervision) Basel 2000ii
Credit Rating and the Impact on Capital Structure by Christian Kronwald (2009)iii Credit Risk+ A Credit Risk Management Framework by CREDIT SUISE|FIRST BOSTONiv http://www.riskglossary.com/link/credit_risk.htmv
9 COMPONENTS OF AN EFFECTIVE LENDING AND CREDIT RISK MANAGEMENT PROGRAM byJames C. Lacovara, MS, Managing Director, Credit Risk Management (ICS RISK ADVISORS)vi http://www.pmanetwork.com/investmentmanagement/creditriskmanagement/vii&viii http://en.wikipedia.org/wiki/Credit_analysisix http://www.bankrate.com/calculators/smart-spending/credit-risk-assessment-test-calculator.aspxx http://www.investopedia.com/terms/c/creditcrunch.asp#ixzz2G9Oimgilxi http://www.investopedia.com/terms/c/credit-exposure.asp#ixzz2G9PfLW2vxiihttp://www.investorwords.com/5490/credit_report.html#ixzz2G4nrwmpnxiii
http://unctad.org/en/Docs/osgdp20081_en.pdf
xiv http://en.wikipedia.org/wiki/Credit_rating_agency#List_of_credit_rating_agencies
xv http://www.moodys.com/ratings-process/How-to-Get-Rated/002001
xvi http://www.standardandpoors.com/aboutcreditratings/
xvii http://www.globalclearinghouse.org/infradev/assets%5C10/documents/Fitch%20-%20The%20Rating%20Process%20(2006).pdfxviii http://www.dbrs.com/research/236737/the-rating-process-corporate-and-structured-finance.pdf